Gareth Vaughan

Fletcher Building will not buy all the Carter Holt Harvey assets put on the block by billionaire Graeme Hart, but might acquire small parts of the businesses.  Speaking after yesterday's annual meeting in Auckland, Fletcher chief executive Jonathan Ling said the building materials manufacturer and distributor would not make any big acquisitions within the next three months.

Mr Hart is selling building product makers and marketers Wood Products New Zealand and Wood Products Australia, the Carters building materials chain, and furniture and joinery business Interion.  Fletcher Building. advised by investment bank Goldman Sachs JBWere, is understood to have looked at these businesses.  However, Carter Holt owner Rank wants to complete any sale, which analysts expect to be about $2 billion, by the end of the year.

Asked about the potential for big acquisitions, Mr Ling said: "There's nothing of any size in the pipeline at the moment."  Asked specifically about the Carter Holt asset sale, he declined to comment, citing confidentiality obligations.  It is understood Fletcher could buy small parts of the businesses, possibly as part of a consortium.  However, international private equity group CVC Capital Partners is believed to be the frontrunner to acquire the Carter Holt assets. 

Mr Ling said Fletcher's current focus was integrating July's US$700 million (NZ$929 million) acquisition of benchtop group Formica from private equity groups Cerberus Capital Management and Oaktree Capital Management.  Mr Ling said the planned closure of a Formica factory in California and the doubling of production at an Ohio factory were running behind schedule.

Fletcher will pay Cerberus and Oaktree a further US$50 million if this restructuring is finished by June 30. Mr Ling said delays would affect this payment but, citing confidentiality agreements, he declined to say how.

Formica's Asian and European operations, which comprise about two-thirds of its business, were performing better than expected, helping to offset the slowing United States economy, he said.  Predicted savings from combining Formica with Fletcher's Laminex business, about $13 million in 2007-08, were on track.

Chairman Roderick Deane said Fletcher's net earnings for the first four months of 2007-08 were ahead of the same stage last year both with and without the inclusion of Formica.

Fletcher was "comfortable" with analysts' forecasts for annual earnings after tax and before unusual items of between $450 million and $460 million.  After removing one-off tax and insurance benefits, last year's profit rose 5 per cent to $399 million. At more than $1 billion, Fletcher's construction backlog was at record levels, Mr Ling said.

Fletcher shares rose 12 cents to $11.30 yesterday.

Fletcher Building is teaming up with Australian rival Boral to bid for Carter Holt Harvey's Wood Products, Carters and Interion businesses being sold by billionaire Graeme Hart in what is expected to be a $2 billion plus deal.

Indicative offers for the Carter Holt assets were due last week. Market sources said yesterday that the Fletcher-Boral combination was facing its main competition from international private equity fund CVC Capital Partners.

Mr Hart is selling wood-based building items manufacturer and marketer Wood Products New Zealand, which has 12 manufacturing sites, Wood Products Australia, which has six, New Zealand's Carters building materials chain and Interion, which markets and sells furniture, joinery and construction products. Combined, these assets are forecasting 2008 earnings before interest, tax, depreciation and amortisation of about $300 million.

Sources suggested that, if successful, Fletcher and Boral planned for the Kiwi firm to take the bulk of the New Zealand assets and Boral to pick up those in Australia. Mr Hart's Rank Group has told Carter Holt staff it wants to complete a sale by the end of the year.

Boral is Australia's biggest building and construction materials supplier and also has operations in the United States and Asia. Kylie FitzGerald, Boral's general manager of corporate affairs and investor relations, declined to comment on "market speculation".

Fletcher chief executive Jonathan Ling said he could not comment "at the moment".

Staff at CVC's Sydney office did not respond to requests for comment. CVC's history in the trans-Tasman building industry includes ownership of laminates and panels business Laminex and insulation, concrete and roofing group Amatek. Ironically, it sold both to Fletcher - Laminex for $754 million in 2002 and Amatek for $582 million - in 2005.

It was unclear whether Rank had received further offers. US forestry group Weyerhaeuser, which sold half of a 67,000-hectare Nelson forestry plantation to partner and fellow US firm Global Forest Partners in June, is touted as a potential bidder. Tasmania forest products group Gunns, which owns a veneer factory in Christchurch, is also a possible bidder. Gunns declined to comment.

Fletcher completed the $1 billion acquisition of US-based benchtop group Formica on July 2, issuing $328 million of new shares to help pay for the deal. It might issue shares to help fund another big buy.

Tower equities fund manager Paul Robertshawe said Fletcher should easily be able to convince investors of the merits of buying Carter Holt assets. Fletcher had a good five-year track record, had not overpaid for previous acquisitions and its finances, with gearing, or debt-to-equity, of 46 per cent were not stretched. "If they come to us with a deal that makes sense I don't think shareholders would be upset about the timing," Mr Robertshawe said.

However, a Fletcher purchase would need Commerce Commission approval as its businesses have significant crossover with Carter Holt, notably PlaceMakers and Carters. Since completing the $3.3 billion acquisition of Carter Holt in March 2006, Mr Hart has already recouped about $1.9 billion.

Graeme Hart has put Carter Holt Harvey's Wood Products business on the block in a deal that could rival the size of Telecom's $2.24 billion Yellow Pages sale.  Wood Products manufactures and markets wood-based building items including timber, plywood, laminated veneer lumber and interior decorative materials.

Market sources said yesterday that Mr Hart was seeking bidders for Wood Products in a sale being managed by investment banks First NZ Capital and Credit Suisse First Boston.  Wood Products has 12 manufacturing sites in New Zealand and six in Australia.  Its brands include Pinex, Laserframe, HyJoist, Bestwood, Ramsey Roundwood, Ecoply and StructaFlor.  The business is thought to produce annual earnings before interest, tax, depreciation and amortisation of about $300 million.

In the biggest New Zealand asset sale so far this year, Telecom sold directories business Yellow Pages to Hong Kong-based CCMP Capital Asia and Canada's Teachers' Private Capital for $2.24 billion in March.  Some sources felt Wood Products could fetch a similar price.

Big international private equity groups, possibly including Cerberus Capital Management, Pacific Equity Partners, CVC Asia Pacific and Champ, are thought to be the most likely bidders.  Mr Hart completed the $3.3 billion acquisition of Carter Holt Harvey in March 2006, delisting what was the stock exchange's third-biggest company.  Since then Mr Hart, whose fortune is conservatively estimated at $2.75 billion, has sold Carter Holt's forests to US timber management organisation Hancock Timber Resource Group for about $1.6 billion and properties including the company's Auckland base to Australia's Valad Property Group for more than $300 million.  He has also spent about $4.5 billion buying Swiss company SIG, Blue Ridge Paper Products of the US and packaging assets from US firm, and former Carter Holt parent, International Paper.  This has transformed Rank Group into the world's second-biggest drinks packager, behind Switzerland's Tetra Laval Group, with about a 15 per cent market share.

After buying Carter Holt at a time of weak international conditions for forestry companies, Mr Hart is looking to sell as the Agriculture and Forestry Ministry predicts 30 per cent growth in forestry export earnings to $4.65 billion in the next four years.

Carter Holt has about 10,000 staff and four other business units - Pulp & Paper, Packaging Carton, Packaging Corrugated and building products chain Carters.

Medical equipment maker Fisher & Paykel Healthcare, anticipating a continuation of 15 per cent to 20 per cent annual growth, is eyeing up overseas sites for manufacturing expansion.

Managing director Mike Daniell told yesterday's annual meeting in Auckland that F&P wanted to spread its geographic risk and cut costs.  If current growth rates continued, the company would reach capacity at its site in East Tamaki, Auckland, in about three years. It expects to continue doubling in size every four to five years.

F&P, which makes 99 per cent of its revenue overseas, plans to investigate potential locations in Asia, Mexico and Eastern Europe.  It was possible that a new building adjacent to its existing two in Auckland could be built concurrently with another overseas.

Risks that F&P wanted to mitigate included Auckland's location on a volcanic field and being able to find enough skilled staff.  "We employ nearly 1500 people now in our East Tamaki site. If we filled that site we could be employing as many as 6000 and that (number) could be difficult to find," Mr Daniell said.  "We're thinking ahead five, 10, 15 years in terms of staff."

F&P makes devices to treat obstructive sleep apnoea (a disorder that disrupts breathing during sleep), respiratory humidification products and patient warming and neonatal care products.  Because in some cases it was the sole supplier to hospitals, it needed to ensure ongoing supply "come what may", Mr Daniell said.

Being closer to major markets could cut freight costs and reduce exposure to the volatile New Zealand dollar.  Mr Daniell expects interim revenue to rise about 15 per cent, slightly less than last year, to between $US125 million ($NZ175 million) and $US130 million.

But, because of the Kiwi dollar's recent strength, in local currency terms interim revenue will be similar to 2006-07's $175 million.  He predicted interim operating profit of about $32 million, down from $46 million.  He reiterated May's forecast for 2007-08 annual operating profit of about $75 million, down from $89.6 million. However, yesterday's forecast was based on a US70c exchange rate whereas May's was based on US73c.

Macquarie Equities analyst Steve Hodgson said the Kiwi dollar returning to more normal levels, and the housing market weakening, was good news for F&P.  However, because of confusion over whether F&P increased or decreased earnings guidance in a currency adjusted sense, its shares slipped 2c to $3.39 yesterday.

Fisher & Paykel Appliances says the Government must take its share of the blame as the whiteware maker prepares to shift its electronics factory from Auckland to Thailand at the cost of 96 jobs.  F&P said yesterday production of electronic circuit boards used in its fridges, washing machines, driers and ovens would be relocated to Rayong - the same Thai location to which F&P moved the production of washing machines and clothes driers from Auckland in April at the cost of 350 jobs.

F&P managing director John Bongard said the "overvalued" Kiwi dollar and New Zealand's interest rates, which are the second highest among the 30 Organisation for Economic Cooperation and Development (OECD) countries, were again factors in the decision.

However, the usually apolitical F&P also blames government policies.  "We've got a trade policy that's just not helpful at all to manufacturers like us," Mr Bongard said.  The Government was "running around consummating free trade deals" with Thailand, China and India that would ultimately give duty free access to "extremely" low labour cost countries.  Free trade deals with the likes of Canada, the United States, the European Union and Japan, which had similar cost bases to New Zealand, would be more beneficial.

"I'd stack our people in New Zealand up against any of those guys any day of the week.  But when it comes to giving duty free access to China, India and Thailand we really are behind the eight ball. If that's in the national interest then so be it but it certainly is not in our interest."

F&P expects shifting its electronics factory to Thailand will save about $6 million a year before tax, mostly through cutting its wage bill.  Further savings are expected from buying electronic components from Thai vendors. The move will, however, come at a one-off pretax cost of $5 million.  The relocation will be completed by December 2008.

Mr Bongard said F&P would work with staff, the Engineering, Printing & Manufacturing Union (EPMU) and other employers to try to find alternative jobs for the 96 workers.

EPMU national secretary Andrew Little said there was a "very serious and desperate" situation in manufacturing.  It would have flow-on effects for the economy and society for years if something was not done to stem the flow of factory closures.  "The Government needs to understand that the incentives from other countries to entice New Zealand manufacturers are significant, and we need to do more as a country to encourage investment in high-end manufacturing.  "A quarter of a million Kiwi workers and their families are relying on it."

F&P's Thai operations will pay no tax for eight years.

Feltex liquidators are demanding more than $20 million from directors, alleging various breaches of the Companies Act and Financial Transactions Reporting Act.  A liquidators' report reveals the total claims and outlines six possible causes of action against the directors.

McDonald Vague consultant and liquidator John Vague said yesterday there were "obviously" questions over whether the carpet maker traded while insolvent.  However, proceedings might not be filed for months and the process would be drawn out, he said.  "At present we think the total claims are $20 million plus., but that, of course, can change. It can grow, it's certainly not going to get less."

Feltex's shares were sold for $1.70 each in a June 2004 float by Credit Suisse First Boston Asian Merchant Partners, a private equity group.  The company was placed in receivership by its bank, ANZ, in September last year.  The company's assets have since been sold to rival Godfrey Hirst, which has shut two of Feltex's New Zealand factories at the cost of more than 250 jobs.

Mr Vague said the directors included three who resigned months before the receivership.  They are Craig Horricks, former chief executive Sam Magill and Fairfax Media NZ chief executive Joan Withers.  The others were Feltex directors at the time of the receivership: John Feeney, John Hagen, David Hunter, chairman Tim Saunders and Peter Thomas.

McDonald Vague's report outlines six potential breaches of the Companies Act and Financial Transactions Reporting Act.

Mr Hagen said the former directors were "quite confident" they took legal advice at appropriate times and disclosed everything that needed to be disclosed.  "(We) think any action by the liquidator would be unfounded."  Mr Saunders is overseas and did not respond to interview requests yesterday.  He is also a Contact Energy director and told its annual meeting in October last year that he was confident he acted properly at all times and in the best interests of Feltex shareholders.

"Clearly the Feltex board, and by implication myself as chairman, carry a responsibility for contributing to the demise of the company. It has been a horrible experience and not one I'd wish on anyone."  Mr Thomas, chief executive in the run-up to the liquidation, and Ms Withers had no comment.

Fletcher Building has been a sharemarket darling for the past five years but investors might have missed out altogether if Fletcher Challenge's board had taken private equity advances more seriously.  In September 2000, when the Fletcher Challenge group was being broken up, a private equity firm came knocking on the door expressing interest in Fletcher's building business.

Though the offer was not made public, BusinessDay understands it came from Credit Suisse First Boston Asian Merchant Partners and was worth about $2.82 a share.  CSFB Asian Merchant Partners is the firm that floated ill-fated carpet maker Feltex in 2004.

Unimpressed with the private equity advances, Fletcher Challenge's board jilted CSFB.  Fletcher Building, with businesses which include PlaceMakers, Fletcher Construction, Golden Bay Cement and Gerard Roofs, listed on the sharemarket as a standalone company in March 2001.

Its shares, which started at $2.23, hit a record high of $13.42 in May after Fletcher Building raised $328 million in a placement of new shares to help fund the $1 billion acquisition of benchtop group Formica. Though the shares have slipped back, they are well above $12.

Roderick Deane, formerly Fletcher Challenge chairman and now chairman of Fletcher Building, recalls that the offer came when the breakup of Fletcher Challenge was well under way.  It would have been a "huge hassle" to address the CSFB offer.  Furthermore, Dr Deane describes the offer as indicative with numerous conditions attached, giving a range of prices rather than a specific one.  "It just seemed to us that it didn't have a large enough premium in it to warrant pursuing and it was too indefinite," Dr Deane says.  "If they'd actually made a firm, unconditional offer then of course the obligation to disclose would have been much more immediate."  The offer was subject to a confidentiality agreement and Dr Deane says the other party did not want it made public.

CSFB spokeswoman Elizabeth Rudall declined to comment.

Fletcher Challenge was broken up in New Zealand's biggest corporate restructure in 2000-01.  Fletcher Paper was sold to Norske Skog for $5 billion.  Shell and Apache Corporation bought Fletcher Energy for about $4.8 billion. Fletcher Forests was listed.  Today, having sold all its forests and its wood processing assets bar a sawmill and mouldings plant in Taupo, it is known as Tenon.

Dr Deane says Fletcher Building was always regarded as the potential crown jewel but it had not been "polished up" for some time.  After analysis the board decided what its strategies should be and pooled the lessons individual directors had learned.  Chief executive Ralph Waters joined in mid-2001.  Since then Fletcher's share price has surged as it has cut costs, made the most of strong construction and infrastructure demand, and expanded in Australia by spending $1.6 billion on acquisitions.  Mr Waters handed the reins to Jonathan Ling last September.

With Formica, Fletcher is now the world's biggest maker of laminate boards for use in kitchens, bathrooms, shops, hospitals and schools.  After starting as a company dependent on the domestic residential building market, it is now on track to make more than half its revenue overseas.  "When we listed Fletcher Building it was No17 on the stock market. Today it's No2 in market cap. I think that's the vindication."

Fletcher Building is going global with the $1 billion acquisition of United States-based Formica Corporation, which makes surfacing materials used in sinks and bench tops.

Fletcher said the deal would cost it US$700 million (NZ$960 million) with additional payments of up to US$50 million if Formica achieves earnings targets. Fletcher's shares have been placed in trading halt today with the company aiming to sell 26 million new shares to raise $300 million to help fund the deal. The balance of the acquisition cost will be funded through bank loans. Fletcher said the acquisition would boost its earnings in the year to June 2008.

"The acquisition provides a logical extension to Fletcher Building's existing decorative surface laminates business," chief executive Jonathan Ling said. "Following strong growth in the company's earnings throughout Australasia in recent years, Formica provides Fletcher Building with the opportunity to establish a truly global laminates platform and significantly increase geographic diversity of our earnings exposure."

Fletcher shares closed down 20 cents at $12.65 yesterday.  Fletcher, whose existing businesses include PlaceMakers, Fletcher Construction, Golden Bay Cement, Gerard Roofs and Laminex, already trades and owns the Formica brand in Australasia.

It is buying the Cincinnati-based Formica off private equity funds Cerberus Capital Management and Oaktree Capital Management. The deal is expected to settle on July 2. Key members of Formica's management team have agreed to stay on. In the 12 months to December, Formica posted revenue of US$737 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of US$75 million. Fletcher expects Formica's EBITDA for the year to June 2008 to be US$94 million before cost savings once the business is combined with Fletcher.

The Auckland-based company expects cost savings of about $13 million in 2008 and $24 million in 2009 through combined procurement, production rationalisation and reduced corporate costs.

Formica is Fletcher's first major acquisition under Mr Ling who replaced Ralph Waters last September. During Mr Waters' five years at Fletcher's helm the company made three acquisitions in Australia worth a combined $1.6 billion. It now makes about 35 per cent of its earnings in Australia. Formica is the market leader in its field in Thailand, Taiwan, Hong Kong, China, Britain, Spain and Scandinavia. It makes 47 per cent of revenue in North America, 39 per cent in Europe and 14 per cent in Asia. Formica has manufacturing plants in Thailand, China, Taiwan, the US, Britain, Finland, Germany and Spain. "Formica's Asian business provides a strong platform to distribute Laminex products, especially low pressure laminate, into the Asian growth markets," Mr Ling said.

Sharemarket darling Fletcher Building is expected to produce a solid half-year result on Wednesday and eyes will be on the company's full-year guidance and any comments on potential acquisitions.

The presentation of the interim results will be chief executive Jonathan Ling's first solo performance since taking the helm from Ralph Waters on September 1.

Fletcher shares have been on a roll during the summer. A multibillion-dollar hostile takeover bid by Mexico's Cemex for Rinker, Australia's biggest maker of building materials, and a takeover approach to construction group Multiplex by United States firm Brookfield Asset Management have highlighted value in the sector.

Fletcher shares touched a record high of $11.60 on January 30 and February 5. On Friday they closed down 7 cents at $11.40.

ABN Amro analyst Dennis Lee expects net profit for the six months to December of $195 million, an increase from the $190 million the building materials maker and distributor posted in the equivalent period of 2005.

First NZ Capital analyst Andrew Mortimer is picking profit to be slightly lower at $188 million, but earnings before interest and tax to be $339 million, up from $335 million. Mr Mortimer, who has a $12 target price on Fletcher's shares, expects an interim dividend of 22 cents a share, up from 19 cents.

At fund manager Walker Capital Management, principal Craig Brown said: "I suspect it will be a pretty good result. "Things seem to be ticking along quite nicely out there."

Mr Mortimer is picking earnings to rise at three Fletcher business units - distribution, laminates & panels, and steel - but earnings at infrastructure and building products to be down. Placemakers, Fletcher's distribution unit, posted record November sales of $100 million.

Mr Lee said his focus would be on Fletcher's outlook for the industry, internal improvement measures and any update on acquisition options.

The results will also be watched for any update on Fletcher's full-year expectations. Chairman Roderick Deane told November's annual meeting that Fletcher was comfortable with the consensus of analysts' forecasts for full-year net profit of $388 million, a 2.4 per cent rise from 2006.

Mr Ling told the annual meeting Fletcher would continue to expand in Australia and New Zealand and was looking at potential acquisitions further afield. Analysts estimate Fletcher could afford to spend about $1.5 billion.

Europe, Asia or the Americas are touted as potential regions for expansion.

In November Fletcher bought Forman Group, a New Zealand insulation firm, for an undisclosed sum.

And last October it acquired Maddren Timber's three building materials distribution stores in northwest Auckland, also for an undisclosed sum.